Tuesday 19 June 2012 15.05 EDT
First published on Tuesday 19 June 2012 15.05 EDT

Greece's politicians appeared to be close to announcing the formation of a government as Europe's leaders geared up for tough negotiations with the new prime minister, Antonis Samaras, about rewriting the conditions of its bailout.

Eurozone finance ministers will meet in Luxembourg on Thursday, amid rumours that Angela Merkel is about to give the green light for the eurozone bailout fund, the European Financial Stability Facility, to wade into financial markets and buy up the bonds of troubled governments.

But even if such a dramatic extension of the EFSF's role helps to calm financial markets and buy time for crisis-hit Spain, ministers will be forced to grapple urgently with the question of whether to reward Greece for choosing a pro-bailout government.

Samaras and his colleagues have made clear that although they are keen to remain within the single currency they would like to see a softening of some of the rules attached to Greece's rescue package. However, Amadeu Altafaj, spokesman for Olli Rehn, said: "No one is talking about a new memorandum of understanding" with Greece.

As politicians in Athens were thrashing out the final details of a coalition with talks due to resume today, the markets continued to focus on Spain, where the fiscal crisis appeared to be worsening.

Madrid was forced to deny reports it would delay announcing the results of an independent audit of its financial institutions until September, amid fears that the troubled banking sector may require more capital than the €100bn (£81bn) offered to Spain by its European partners.

An initial health-check of the banks will be published on Thursday, and an economy ministry spokesman told the Reuters news agency last night the detailed audit was on schedule and would be released on July 31. But the earlier report of a delay added to concerns about the damage sustained by Spanish banks amid the deteriorating economic outlook.

The Spanish prime minister, Mariano Rajoy, was reported to have failed to persuade his fellow leaders at the G20 summit to allow him to exclude the €100bn bank rescue fund from Spain's national debt.

"Connecting banking risk and sovereign risk has become very damaging," Rajoy told leaders at the meeting in Mexico, according to Spanish reporters who accompanied him. Including the new loan would increase Spain's national debt by up to 15%.

At a disastrous bond auction on Tuesday Spain was forced to pay more than 5% to borrow €2.4bn for just 12 months, in another signal that investors are losing confidence in Madrid's ability to service its debts.

Analysts are increasingly speculating that the government will be forced to accept a full-blown bailout in the coming months. "It is inevitable," said Harvinder Sian, of RBS. "The market has made its statement. There has to be a change in the way the Europeans are attacking the crisis." There was also evidence on Tuesday that growing anxiety about the impact of the turmoil in the eurozone economy had spread even to some of its strongest members. Confidence among Germany's investors and economists has plunged at its fastest rate since October 1998, before the launch of the single currency, according to the ZEW economic institute.

European leaders appeared to be responding to the pressure for more radical action as they considered allowing the EFSF to act as a buyer of last resort for government bonds – a radical extension of its remit.

However, investors are likely to be concerned about whether the EFSF, which will soon be replaced by a permanent successor, the European Stability Mechanism, will have sufficient resources to lean against the markets.

Bond yields in countries including Denmark and Germany have turned negative in recent days, signalling that investors are effectively willing to pay safe haven governments to hold on to their money, rather than risk lending it out to troubled countries such as Italy or Spain.

The European parliament on Tuesday pressed ahead with the task of re-regulating the financial sector, recommending reforms to credit ratings agencies including allowing them to be sued by investors under civil law if they made mistakes.

"The debt crisis in the eurozone has shown that credit rating agencies have gained too much influence, to the point of being able to influence the political agenda. In response we have strengthened rules on sovereign debt ratings and conflicts of interest," said Leonardo Domenici, the Italian MEP steering the reform through parliament.